Scandals emerge in Shanghai as political season nears - Asia - Pacific - International Herald Tribune

SHANGHAI — In a reversal of fortunes that may say as much about Chinese power politics as it does about corruption, China's richest commercial city has come under investigation by the central government for a huge pension fraud scheme.

So far, the budding scandal, which has been written about in unusual detail in the country's news media, has ensnared the chief of the city's Labor and Social Security Bureau, or pension fund, along with the chairman of the Shanghai Electric Group, a municipal utility.

The two, along with the heads of at least two of the city's districts, including a former top aide to the city's Communist Party leader, have been taken to Nanjing, where they are being held by investigators for interrogation.

Meanwhile, the presence of more than 100 investigators from the party's Central Commission for Discipline Inspection, who have been sent here from Beijing and have taken up residence in a historic old hotel, has fed widespread speculation that the arrest or demotion of others, possibly including more senior municipal and party officials, may follow.

The Chinese government routinely bans publication of articles on subjects it deems sensitive or embarrassing, so the widespread reporting on the scandal here has led many to conclude that it is the first act in what may be a long season of political jockeying leading up to the 17th Communist Party Congress next year, in which the next generation of national leaders will be selected.

In recent years Shanghai appeared to be all but immune to high-level scandals, with the city's leaders benefiting from the patronage of Jiang Zemin, the country's former leader, who rose to national prominence as mayor of the city and cultivated it as a power base.

Indeed, three years ago a large team of investigators descended from Beijing to look into collusion between officials and real estate developers, only to be recalled abruptly to Beijing, reportedly at Jiang's insistence.

That scandal began with residents' claims that they had been forced to relocate after developers secured rights to their land through illegal payments to city officials. After the investigation was quashed, the news media were ordered not to write about corrupt land deals, and the lawyer for the displaced residents, Zheng Enchong, was jailed for contacting international human rights groups.

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But with Jiang having relinquished the last of his important titles in 2004, many here say, the way has been opened for a new investigation that many see as an attack on Jiang's old power base by allies of a younger generation of leaders.

In the current scandal, according to reports in the Chinese news media, city officials arranged for $1.2 billion of municipal pension funds to be lent to an obscure private holding company for investment in a toll expressway between Shanghai and the nearby city of Hangzhou.

Chinese journalists who have reported on the case say the loan was nearly paid off when employees at the highway company informed on their superiors, bringing the arrangement to light.

Chinese news reports have said that if the investigators are allowed to pursue their work to its conclusion, the highway deal may in the end prove to be a modest piece of a much larger web of corruption linking city officials, banks and developers.

The newsweekly Caijing, for example, has carried detailed reports of how money from the city's Social Security Bureau was funneled into private real estate projects as long ago as the early 1990's.

"At the center of the issue is the bureau's dual role as both administrative regulator and investment manager of the fund, despite public demand to entrust the fund to market-oriented operators," the magazine wrote in a cover story on the scandal. "The monopoly it created is at the root of the fund's current problems."

Besides weakening the city's national political standing, the pension scandal constitutes a blow to Shanghai's ambition to emerge as China's pre-eminent financial center. As with the suppressed real estate scandal, the reported pension dealings highlight the lack of transparency in a system in which the news media and the courts are subjected to political direction.